––– a weblog focusing on fixed income financial markets, and disconnects within them

Thursday, March 10, 2011

Christine Richard, on Confidence

Earlier this week, Expect[ed] Loss sat down with Christine Richard, author of Confidence Game. If you haven’t already read the book well firstly shame on you. The paperback’s due out next week so pick it up. It’s a vital story.

Briefly, the book tells of a hedge fund investor’s campaign to bring attention to what he felt to be material shortcomings within a AAA-rated, systemically important insurance company. He’s short their credit default swap, which means he stands to profit if other market participants, authorities, rating agencies or regulators can be convinced to agree with his take. Of course, he walks the line between good and evil: he provides a material public good in a way in warning of a systemic concern, but in doing so his warnings serve to cloud the viability of a systemically important public company, while creating a profit for him.

We’re not here to spoil the book for those of you who haven’t read it yet. But we’re going to provide you with a couple of snippets from our conversation. Any wisdom coming from the interview belongs to Christine. Any errors are ours.

EL: Christine your book describes activist investor Bill Ackman’s crusade, and really it’s quite a lonely crusade isn’t it, against an insurance company he believed to need reforming and perhaps a whole system he felt was broken. Having seen how reform and regulation has transpired since, how the world has moved on, well has it affected your perception of the value of your work. Was the book fulfilling to you?

CR: I'm pleased with the book and the response I've gotten from people who've read it. I think it succeeds in combining a very human story with the larger story about what went wrong on Wall Street. I do find it discouraging that the FCIC left the role of the bond insurers out of its 500-page-plus report. I think that the loss of confidence in the triple-A ratings of companies like MBIA was the beginning of the unraveling of everything. Most of the companies have crept quietly off the stage but still I think the story of their collapse is worth understanding. They were the first, really, to figure out that the triple-A rating was one of the most powerful brands in the world. Before the crisis, their collapse was unthinkable. Even the idea that they might be downgraded to AA from AAA was unimaginable. It shows you just how fragile and delusional the financial system had become.

EL: Companies can fail for all sorts of things, often trace-able to poor communication between management and the board and shareholders. But here that wasn’t really the problem – Ackman, like Harry Markopolos in a way, was all about communication. He went to regulators, to the attorney generals, to the executives at the ratings agencies. He wrote detailed reports, ran extensive analyses, produced an open source model at a time in which analytics were expensive and the market opaque. What can be taken from all his efforts? All these authorities he went to that were deaf to his comments - did they all just have a distortion field around them at the time?

CR: Some of the reasons people wouldn't listen to Bill were obvious. It wasn't in their interest to be critical of a company that could turn any bond into a top-rated security. For a while, the main business of Wall Street was manufacturing triple-A-rated securities. I also think there were psychological reasons that people didn't want to listen. No one wants to be told how to do their job or that they have it all wrong. Plus, Bill had this huge financial motivation to scare people about the bond insurers so that he could make money on his credit default swap position. It was hard to look beyond the self-interest and really think through the argument. Above all, the triple-A credit rating shielded the company from critics.

EL: When we read interviews of Inside Job director Charles Ferguson, they often ask him about the language barrier of finance. Overcoming the barrier might be quite difficult for some reporters who are not too familiar with finance. Now I know you’ve been covering the debt market for many years at Dow Jones from well before you were at Bloomberg. And you’ve written a page turner, you really have, it’s remarkable. But was there a, how do we say it, complexity barrier for you to overcome?

CR: The financial system became so unbelievably complex. And, bond insurance layered more complexity on top of complexity. I didn't want to shy away from writing about credit default swaps or collateralized debt obligations but I was always conscious that I needed to quickly offset the technical explanations with something a human being could relate to. Bill's willingness to share his personal experiences, to let me look through thousands of emails and to interview his friends and colleagues made it possible to write a story that's as much about human nature as it is about bonds or credit default swaps or collapsing mortgage securities. One of my favorite parts of the book is when Moody's finally puts MBIA under review and Bill is at his grandmother's 90th birthday at the Plaza Hotel. He's trying to piece together how a credit rating downgrade might unravel the whole company and how that is going to trigger payments of billions of dollars on his swaps. Meanwhile, the waiter is holding up a cake and his family is singing Happy Birthday and he's trying to sing and to read Bloomberg headlines and communicate with his trader on a Blackberry under the table.

EL: You mention even at Dow Jones that there wasn’t much patience for your investigative tendencies, your interest in digging deeper. And you’ve mentioned to me before the pressures to keep current – how nobody wants you going back and following up on stories of the past. Is this the new normal?

CR: It's a big part of what business journalism aspires to do -- to give people information to trade on, to move stocks, to make profitable predictions. Maybe it explains why the M&A reporters get so much of the attention. I've always enjoyed telling stories more than making forecasts. In the case of MBIA, I found the company's history of covering up losses so fascinating because it revealed its vulnerability. It had to be infallible or it was finished. That made going back and looking at the past important. The past held all the clues about what was going to happen.

EL: Christine before I let you go I want to ask you one thing – does Bill inspire you?

CR: I spoke with Bill for six years before I started writing the book. What I enjoyed most about our interactions was his enthusiasm for the research. He was fanatical about figuring out what made the company tick, and he seemed to have more fun reading financial statements than anyone I've ever met. He also just has this incredible optimism. He'd come back from a meeting with one of the credit rating agencies (back in the days when he was giving two-hour long presentations about why MBIA should be downgraded and he was being ignored) and an employee at Pershing Square would ask how it went. It was always the same response -- "On a scale of one-to-ten, the meeting was definitely a ten." Eventually, people didn't even bother to ask Bill about meetings, they just looked at each as he came through the door: "Ten out of ten?" "Yep, ten out of ten?" It's a great message about believing in yourself and persevering when the world thinks you're wrong.

3 comments:

As a lawyer who was formerly at one of the failing competitors I can tell you that this book is right on target. I learnt a lot about my own company from reading it. But Question for you guys at EL (and anybody else who reads this column): is there a model that works in this space? I've got to think there's enough interest and direction to get a new well-managed constructive company together to wrap munis.

This book goes deeper than the Big Short but on the downside suffers from not having as broad an appeal. Thanks and keep it up and please interview Mr Lewis when he finishes up on Greece, Ireland and Caifornia